A PROPOSED ADVICE MARKET STRUCTURE
Prepared by AIOFP
Executive Director Peter Johnston
The AIOFP believes Minister Stephen Jones has created a once in a generation financial services landscape opportunity to implement meaningful change that will benefit all stakeholders. Please consider the AIOFP’s recommendations to create a credible and workable outcome for all participants.
There are two critically important issues that need to be understood and addressed from the outset to create an efficient [and almost perfect] working environment that will benefit consumers and the industry in general –
- It is very unlikely there will ever be a perfectly structured marketplace with total separation of product and advice where consumers pay Advisers to select the best products/services and product manufacturers do not have internal Advice functions. As a consequence, there will always be a hybrid approach to financial advice due to the growth and dominance of Industry Superannuation Funds [ISF] over the decades. Based on poor consumer outcomes over many years and the damming Royal Commission findings, the Banks should not be permitted to enter the advice process on any level ever again.
- The industry needs the full cooperation from ASIC/AFCA, both should be transparent and consistent with their views and interpretation of the Law to avoid market confusion and anti – consumer outcomes.
Their cooperation is critical to reducing the cost of advice by giving clear meaningful guidance to all stakeholders. For example, the Law stipulates under 947B that a Statement Of Advice [SOA] should be CLEAR, CONCISE and EFFECTIVE, they are clearly not. ASIC has either consciously or unwittingly influenced the lawful outcome by imposing its own Regulatory overlay which has been to the detriment of consumers, the very stakeholder they should be protecting. The Advice community needs an ongoing regular dialogue with ASIC and AFCA to avoid confusion with the unwieldy, inefficient and overly proscriptive compliance conditions. This environment is almost entirely responsible for the spiralling consumer advice costs and Advisers unnecessarily departing the profession.
It should be noted that AFCA are a willing, valued and welcomed participant at industry events. ASIC also attends industry functions but are guarded about discussing critical issues the Advice community needs to operate more efficiently.
LIKELY INDUSTRY DIRECTION.
The Minister has made it very clear that SUPERANNUATION FUNDS are preferred to BANKS participating in the distribution of advice/information to consumers. We agree, Banks are driven by Shareholder priority outcomes and Super Funds have a fiduciary duty to their members, not perfect in a vertically integrated context but workable considering the ideal industry model is not achievable at this point in time.
We recommend there are 3 providers of Advice and/or information categories to consumers –
- Relevant Advice providers.
- Non – Relevant providers.
- Risk Insurance Advice providers.
Relevant Advice providers comply with the prevailing Laws and provide financial advice across the broad spectrum of the information universe.
Non – Relevant providers give factual product information on specific products within the Super fund/Institution they are employed by outside of Advice regulation. This includes Centrelink information and generic retirement planning strategies related to their account balance after completing an approved training program.
Risk Insurance Advisers [new entrants] must complete an approved Risk focussed Diploma course [unless covered by the 10 year rule] and pass an amended risk/ethics orientated exam. Risk information constitutes around 20% of the information universe suggesting the course duration should be 20% of a 3-year degree course for new entrants. If a Risk Insurance Adviser wants to move into full advice, they must comply with the prevailing laws for Relevant providers. Serious consideration should be given to recently displaced LIF/FASEA Risk Adviser victims having an amnesty period to return as a Risk Insurance Adviser after passing a revamped FASEA/Risk exam. Risk only Advisers today number less than 800.
The term ‘Advice’ should be excluded from the Non – Relevant provider vocabulary to avoid confusion for consumers, the QAR Report supports this position. Industry Fund members who want information relating to Centrelink entitlements can freely access and use online digital Calculator and Estimators at any time. Getting assistance from Super Fund Non – Relevant providers with this information could not be misconstrued as ‘personal Advice’, these online tools are not currently on Industry Fund websites but can be easily placed there.
The provision of factual information by Super Fund trained staff is not detrimental to members, in fact it will significantly reduce the cost of providing Advice outcomes ultimately benefitting member account balances with lower overall administration costs. This process is also not a threat to services provided by most external Relevant Advice providers who cannot service this end of the market due to prohibitive compliance costs.
There is a current trend for Industry Super funds to outsource the Financial Advice function to external Relevant Advice providers producing significant cost savings to the Fund/members by not employing Advisers and reducing AFSL Risk to management. This should be further encouraged by APRA.
Relevant Advice and Risk Insurance Adviser Providers should be subject to a best interest duty and consideration should be given to Non Relevant providers operating under a ‘Good Advice’ process once its parameters are known.
The Life Insurance Framework Legislation [LIF] has and is an unmitigated disaster for the Risk Insurance Industry and more importantly consumers whose premiums have doubled over the past 5 year, strong consideration should be given to returning the industry back to pre LIF conditions.
The current professional year specifications need to be amended now the Banks and most likely the Super Funds are no longer the ‘nursery’ for new entrants. Advice practices do not have the resources to fund the demands of a professional year, it is a major disincentive for recruiting the future Adviser cohort into the industry. Lesser demands/conditions or a Government subsidy must be considered.
Accountants should become a non – Relevant Provider to offer SMSF structures to consumers but must become a Relevant Provider if financial advice is involved.
Stock Brokers should only be subjected to an amended FASEA Exam focussing on industry relevant content and the ‘nasty’ ambiguous aspects removed.
Credible offshore research strongly suggests the use of digital/robo advice with Consumers is a global failure, its only success is with product related decision making. We do not see it playing a pivotal advice role in the short to medium term with the nation’s current demographics unless new innovations evolve.
The current compliance regime is not remotely fit for purpose, expensive and grossly inappropriate for consumers and the advice process in general. The previous Government used compliance as a ‘culling’ tool to remove Advisers from the industry but neglected the consumer cost outcomes and ramifications.
All stakeholders agree that SOA construction must be replaced with a procedure where Relevant and Risk Advisers use their professional judgment to decide on what level of written information the consumer’s needs to satisfy their specific circumstances.
All stakeholders agree a written document is required to protect both the Adviser and client if things do not go according to plan, but let the courts decide on whether the paperwork is sufficient or not – just like all other professions.
We believe Annual Opt – in, Annual Fee Consent forms and the Annual Fee Disclosure Statements should all be immediately eliminated. This superfluous unnecessary expensive paperwork was a direct reaction to the Banks poor behaviour pre Royal Commission and was [probably] justified at the time. The Banks are now gone from the industry leaving Consumers to pay for this abominable injustice.
Nowhere in the world can we find evidence of any Government that has been as invasive, nefarious and fanatical as the last Federal Government and its agenda against the Advice community. Not only has this behaviour caused widespread mental health decay and suicides within the advice community, it has been diabolical for consumers, the one stakeholder they should have been protecting.
To Minister Jones’s great credit, this 9 year nightmare has been analysed and will be methodically dismembered in due course. It is no mere coincidence that the previous Governments QAR appointed process has recommended dismantling the very regime they inflicted on the Advice Community and consumers, a preposterously damming outcome to say the least.
The Minister’s preferred position of allowing Superannuation funds to participate in the distribution of information to members by Non – Relevant providers makes practical sense.
In theory, this procedure should be available to all Financial Institutions with internal clients seeking only product and related information.
Substantial rationalisation of the compliance regime, Superannuation Funds and other institutions delivering product related information via trained staff, meaningful cooperation of ASIC/AFCA, pre LIF Risk conditions returned and long overdue respectful treatment of the Advice profession will deliver the cost savings, distribution and advice quality Government is seeking to achieve.